Merkel Mandate Won't Spur Leap Forward On Europe

Angela Merkel has emerged from the German election with the closest thing to a governing mandate since Helmut Kohl rode to victory in 1990 on the feel-good wave of reunification.

* Merkel wins strongest mandate since Kohl in 1990

* Closer integration steps limited by court, eurosceptics

* Berlin focus on competitiveness may disappoint partners

Angela Merkel has emerged from the German election with the closest thing to a governing mandate since Helmut Kohl rode to victory in 1990 on the feel-good wave of reunification.

Yet it would be wrong to expect a bold leap forward in the German leader's euro zone strategy, even if she does end up, as expected, in a coalition with the staunchly pro-European Social Democrats (SPD), giving her a dominant majority in parliament.

Constraints at home and abroad -- from the German Constitutional Court, to British euroscepticism and French resistance to EU treaty change -- mean Merkel is likely to press ahead with closer integration of Europe in the cautious, consensus-driven way that has become her hallmark.

That will mean a continued shift away from the federalist approach that German governments promoted for decades to a more a la carte, inter-governmental style that is acceptable to Paris, London and voters at home.

"There has been a cultural shift," said Jan Techau of the Carnegie Europe think-tank.

This does not mean an abandonment of Berlin's ultimate goal of a more united Europe, as British Prime Minister David Cameron seems to be hoping after recent comments by Merkel that she may seek to pull powers back from Brussels.

Instead, it is the coldly scientific answer of the trained physicist to the formidable constraints she faces.

The thrust of her strategy, according to aides, remains to push slowly but surely towards a more integrated Europe, while ensuring constituents at home and partners abroad stay on board.

"Stabilising the euro, making Europe more competitive and ensuring the parts are in place to prevent future crises -- this will be one of the absolute top priorities in a new term," a senior Merkel aide told Reuters on condition of anonymity.

"The debate of the past years has been about what powers can be transferred to Brussels. Now Merkel is talking about taking some powers back. But she means something different than the British."

FIRST CLUES

Merkel gave some first clues about her European priorities on Monday, a day after polling 41.5 percent, nearly enough to give her conservatives the first absolute majority in parliament since Konrad Adenauer half a century ago.

She described it as a "very strong vote" for a united Europe, a message that will be music to the ears of her partners in Paris, Brussels, Athens, Lisbon and Madrid -- who are eager for Berlin to spell out a vision for the bloc.

The flip side is that Germany's image of a united Europe does not always match that of its southern partners.

Mutualisation of debt remains an absolute taboo for Merkel. Even the SPD, with whom she could start preliminary coalition talks in the coming weeks, has stopped talking openly about the need for common euro zone bonds or a debt redemption fund, ideas its leaders promoted at the height of the crisis.

The big question is how she will behave on banking union, Europe's most ambitious current integration project. Until now Finance Minister Wolfgang Schaeuble has insisted that without treaty change, Europe must stick to less-ambitious "timber-framed" approach, that largely shields German taxpayers from the risks of foreign banks.

But Daniela Schwarzer of the German Institute for International and Security Studies sees scope for a softening now that the election is out of the way.

"I don't think the German government will give up on the goal of treaty change, but it could agree to move on banking union before that has been achieved," she said, citing the so-called "fiscal compact" treaty on budget discipline, which went ahead on condition it be written into EU law within five years.

Merkel's integration push, she signalled on Monday, will focus on boosting European competitiveness -- code for making southern laggards more like Germany, with less protective labour markets, later retirement and less generous jobless benefits.

"Ten to 12 years ago we were the sick man of Europe and reforms helped turn us into a stability anchor. What we achieved in Germany, others can do too," Merkel said. "This election gives me a chance to continue pushing Europe down this path."

Berlin aims to pursue that goal by making laggards enter into binding contracts with EU authorities, enforceable in the European Court of Justice. But her approach may offer too small a carrot and too big a stick to win acceptance.

DODGED A BULLET

Merkel dodged a bullet in the election, when a new anti-euro party, the Alternative for Germany (AfD), narrowly failed to make it into the Bundestag lower house.

But the AfD will continue to make noise in the run-up to European Parliament elections in May which are expected to deliver strong gains for eurosceptic parties on the far left and right of the political spectrum around Europe.

In October, the German Constitutional Court will rule on the legality of European Central Bank President Mario Draghi's so far unused bond-buying programme, the announcement of which calmed financial markets last year, stabilising the euro.

Should the court continue to limit on closer integration, Merkel may feel compelled to examine changes to Germany's "Basic Law", an idea which both the SPD and Schaeuble have supported. A 'grand coalition' would make such change easier to push through.

But the area in which the SPD may have the most influence, Schwarzer believes, is on domestic economic policy, by convincing Merkel to plough more public spending into infrastructure, research and development, and education.

"This could boost the economy, fuel demand and help the euro zone to rebalance," she said.